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What's Next for China's Housing Market
Moody's
China's housing market is a key part of the government's urbanisation push.
Urbanisation policies will change as past methods hit diminishing returns.
Upcoming reforms will attempt to make cities denser, improve rural and urban productivity via market mechanisms, and put local government finances on a more stable path.
China's housing market is a perennial puzzle to outsiders, raising fears about price bubbles even as it reflects the country's dramatic social and economic transformation. Recent data present a mixed picture of its state. Fundamental indicators such as price-to-income or price-to-rent ratios remain high. Anecdotes of excess inventory and "ghost cities" with blocks of uninhabited apartments abound, and China's second-ever bond default, by Zhejiang Xingrun Real Estate Co. in March, is also fueling uncertainty about flagging demand for apartments.
On the other hand, supply shortages in major cities such as Shanghai and Beijing are driving prices higher. Authorities are pushing ahead with plans to further transform the country through continued urbanisation, which would see another 100 million people moving into China's cities by 2020. The government spent CNY1.12 trillion (US$180 billion) on redeveloping shantytowns in 2013, and has announced a similar spending target for 2014.
This article provides a brief overview of China's housing market. Demand is cooling on a macro level, especially in smaller cities, mostly as a result of the government's tightening stance. The government continues to prioritize urbanisation, although the methods will have to change.
The state of China's property market
Although the central government maintains a restrictive stance on housing in general, Premier Li Keqiang has advocated local governments take a differentiated approach based on the market characteristics of individual cities. Tier one cities such as Shanghai and Beijing, which are experiencing the greatest price growth, have the most restrictive policies, such as a 70% down payment requirement for second home mortgages, restrictions on third home purchases, or a 20% capital gains tax on sales.
These restrictions appear to be working. China's property market is still overheated, but cooling. The official 70-city series shows that property prices rose in 57 out of 70 cities in February, which is still high. But price growth on a nationwide basis appears to be slowing. Our weighted aggregate series shows prices among the 70 cities rose 8.8% y/y in February, down from a peak of 10.1% y/y in November. As such, the policy direction is moving towards easing. Wenzhou was the first to do so, by lifting a restriction on multiple home purchases in August. There are reports that other lower-tier cities such as Hangzhou and Changsha are also on the verge of easing various housing restrictions.
China's growing dependence on housing
Changes to housing policy are increasingly important because of the expanding role that housing plays in the economy. Over the past 16 years investment in residential buildings has regularly risen at double the pace of GDP growth, with the result that in 2013 residential investment accounted for 10.4% of GDP or CNY5.89 trillion (US$949 billion), a steady increase from 1.95% of GDP in 1997.
At present, changes in housing affect the economy through the investment and materials production channel. Changes in the housing market would have a big impact on household wealth—a 2013 survey of 28,000 households by the Southwestern University of Finance and Economics in Chengdu showed 66.1% of household assets were in housing, versus 40% for U.S. households—but whether Chinese households can act on these changes is another question. The secondary market is still quite undeveloped and a lack of leverage means less need for forced selling of underwater homes; people are more likely to ride out price declines. As the economy transitions to a consumption-based model, the wealth effect from housing will play a greater role.
Even denser cities?
Short-term fluctuations in China's housing market must be considered in the context of the longer-term trend of urbanisation. As of 2012, 712 million Chinese or 52.6% of the total population live in urban areas while 642 million live in rural areas. The government aims to raise the urban ratio to 60% by 2020. Using the U.N.'s 2020 population projection for China of 1.387 billion, a 60% urbanization rate would mean an additional 100 million people migrating to cities, or about 15 million per year. Current trends make this goal achievable, but significant policy changes are necessary.
Many of the easy economic gains from urbanisation, such as building transport networks and converting rural areas into urban land, have been realised, and continued reliance on these methods of urbanisation will reap increasingly marginal gains. There are also hard constraints. Local governments have already sold off the best parcels of land. Total farmland is now falling close to the 120 million hectare "red line" deemed necessary to ensure an adequate food supply.
Local governments are also starting to face the costs and obligations of urbanisation, such as higher expectations of social services and environmental degradation. Their fiscal policies, which are financed in large part by land sales, are not equipped to handle this new era and so many have taken on large sums of debt to finance growth.
A recent report by the World Bank and the Development Research Center of China's State Council provides a blueprint for a path to reform. There are six broad measures that have been discussed among policy circles, including market-driven rural land reform, hukou reform, and reforms of local government finances. These policies would boost agricultural productivity while encouraging greater urban density.
The World Bank notes that as China develops, many industrial areas can be converted to higher density commercial and residential use. China's third largest city, Guangzhou, for instance, could accommodate 4.2 million more people if its density increased to the level of Seoul, South Korea.
